On 12 November 2015, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Bill) was enacted, extending the reach of the current unfair consumer contract terms protections to small business.  The new law comes into effect in a little under 12 months, on 12 November 2016.

Businesses will need to review their B2B standard form contracts on both supply and procurement sides before 12 November 2016 to minimise the risk of important contractual terms not being enforceable and contravening certain other key ACL provisions.

New 12 month phase-in period

The Bill received Royal Assent on 12 November 2015.

From this date, a business that uses a standard form contract when dealing with a small business has 12 months to comply with the new law and ensure that none of their contract terms are “unfair”. This period was increased by the Senate from the original period of 6 months.

This means that the new law will come into effect on 12 November 2016.

Increase to monetary threshold amounts in new small business test

The Senate, initiated by Australian Greens and Liberal Democratic Party Senators, recently insisted on certain key amendments being made to the Bill. With these amendments being agreed to by the upper house, a contract will now be deemed to be a “small business contract” if:

  • at the time the contract was entered into, at least 1 party is a business that employs fewer than 20 people (calculated using a head count approach looking at the persons a business employs on a full time, part time and regular casual basis); and
  • where the contract is for 12 months or less, the upfront price payable under the contract does not exceed $300,000 (up from the previous $100,000), or, if the contract is for more than 12 months, the upfront price payable under the contract does not exceed $1 million (up from the previous $250,000).

The Senate’s increase to the prescribed threshold limits were aimed at broadening the reach of the new law by capturing a larger number of small business contracts. It has been estimated that with the increased monetary limits, around 95% of small business contracts will be covered, up from an estimate of 80% under the original lower threshold.

This key amendment comes on the back of recent criticism in the media that the previous $100,000/$250,000 cap would serve to undermine the government’s election promise to protect small business and ‘emasculated’ the protection afforded by the new law by allowing big business ‘wriggle room’.

Importantly, it would seem that if there is no upfront price payable under a standard form contract, then the contract will not be a “small business contract” and the new law will not apply to the contract.

The fundamentals of the new law

The new law has significant implications for B2B transactions. As the Bill operates to extend the current unfair contract terms regime to a contract where one party is a “small business”, the new small business protection will only apply to “standard form contracts” with a contract value less than the prescribed threshold and then will only void a term that is “unfair”.

The existing concepts of “unfair” and “standard form contracts” in the current unfair contract terms regime are unchanged and are therefore key concepts of the new law.

For an in depth analysis of the new law and the existing key concepts, please refer to our previous Focus Paper, Draft legislation before Federal Parliament to extend the ACL’s unfair consumer contract terms protections to B2B contracts.

Consequences of using an unfair term

Whilst there are no specific penalties associated with a contract term being held to be “unfair”, dealings with a small business that are deemed “unfair” whether in contract terms or negotiating or enforcing a contract may be held to be unconscionable (with fines of up to $1.1 million for corporations and up to $220,000 for individuals) or link to misleading and deceptive conduct.

It remains to be seen how aggressively the ACCC will enforce the new law. However the writing is on the wall as the ACCC has allocated $1.4 million in funding to provide guidance material and to monitor compliance with the new law. In fact, the ACCC recently launched a couple of videos via its website and YouTube to educate people about their rights and obligations under the new law.

How will this affect your business?

The new law has implications for all sorts of standardised B2B contracts like on-line terms of sale, terms and conditions of supply where manufacturers or retailers have a significant number of smaller suppliers or distributors, IP licensing arrangements and the like.

Businesses will need to review their B2B standard form contracts before the Bill becomes law to minimise the risk of important contractual terms not being enforceable.

B2B contracts that pre-date the new law coming into effect will not fall within the ambit of the regime unless they are renewed or renegotiated so care needs to be taken with this.